The Relationship Between Inflation & Condominium

Maybe you’ve heard it said before: “Condo Fees increase with inflation.” It’s a pretty good rule of thumb, but… why is that?

To help set the stage let’s ask two questions: what are condo fees, and what is a condominium?.  A very simple answer might be:

• A condominium is a unique non-for-profit corporate entity. A kind of business; and,

• Condo fees are the contributions collected each month, from condo owners, to cover all (or the vast majority of) the costs of running a condominium.

So, what does that have to do with inflation?

Well as a kind of business, the Condominium is expected to prepare, approve and distribute a budget to the condo owners every fiscal term. The budget will forecast planned expenses for the upcoming year, and will inform how much condo fees will increase to cover those expenses.

You can read us talking all about budgets in a future post, if that’s your tea, but for this topic: the only interesting part of budgets is how much money the budget plans to have left at the end of the year, after all those expenses are paid for. This is what accounts refer to as your ‘net income’.

Well, (as a non-profit) a Condominium Budget should have a net income of $0.00. See, not retaining a profit means your condominium should plan to have just enough money to pay their bills, nothing less. Put another way: the condo is only budgeting for what it (thinks it) needs.

A few questions might come to mind:

• Okay, if so condominium fees should net $0 then the condo is not planning on having money left over (equity). But without extra money, won’t the Condo be in a tight spot if something goes wrong?

• How exactly does a Board know how much money to put aside?

To address all of this, a Board will make what we’re going to call, for the sake of discussion, a best guess.

“But wait!” cries the concerned condo owner “A best guess isn’t good enough, this is people’s money. There’s absolutely, definitely, definitively, zero way they could be bang-on!”

Well yeah. That’s true.

Sure, this is people’s money. But a best guess is really all the Condo has. We should probably put an emphasis on best though, because maybe we’re under selling what the condo is actually doing.

A budget considers numerous factors: planned and capital projects, carry forward equity, historical actuals, David from the landscaping committee whose been asking to plant flowers for at least a decade, and *drumroll* inflation.

Inflation hits, gas prices go up, and so does the cost to fill a vehicle. Garbage trucks eat fuel, waste pick-up fees increase.

Electrical rates rise, costs of keeping the lights on goes up. Offices need lighting, a handful (or more) contracts increase accordingly.

Food prices increase, restaurants are more expensive, employees need lunch money, contracts rise again.

Inflation. Hits. Everything.

I’m going to go out on a limb and say the average Board Treasurer does not have a magic mirror forecasting market inflation. So instead, your Board considers what recent years have been like, and what kind of trend they’ve seen in their actuals. They review how the market is changing for their utilities, insurance, and the like. Maybe the manager looks at what other similar condos are doing.

Then, after considering all of that, they best guess.

[sidebar]

Fun fact! Whenever you deal with other people’s money, the safe guess is always a little bit higher than what you’re hoping for. Better for Condos to be just that bit more prepared, for the inevitable times when they find they weren’t.

So, even if a Condos finances look fantastic, let’s slow down on begrudging the Board that still increases fees like, 1.25%. When the proverbial happens, those Condos are always in a better spot than their neighbors.
[Okay, sidebar over]

So, back to the question at hand why do Condo Fees increase with inflation? Because they have to.

Condo’s that ignore inflation may find themselves underprepared for increases to insurance, utilities, or contracts. Never a great place for the Board (and their Owners) to be when their manager comes knocking to discuss the next budget.

We hope this article has helped you better understand Condominiums! We believe strongly in the power of better arming Condominium Owners, Boards, and this business as a whole with more information on our very unique industry. Have questions? Please reach out anytime, we love this stuff.

Thanks for reading!

Shaun J. Coles
Owner | SJC Document Reviews
Serving Canadians, in Condos